Europe’s real estate industry is in a good place this year, according to Emerging Trends in Real Estate Europe 2014. The Urban Land Institute’s/PwC’s annual canvass of the continent’s major players – more than 500 were surveyed or interviewed – finds most of them in an upbeat mood. Over half think Europe’s economy will improve and their worries over a Eurozone break-up – and other political uncertainties – have eased. “We are more optimistic for Europe than we have been for some considerable time,” one CEO of a global advisory business told Emerging Trends.
This is reflected in the survey’s findings: over half of the respondents expect to increase their profits this year, while 36% think they will be hiring more staff (see fig 1). There are, of course, variations. Those in Southern Europe, Benelux and Switzerland are somewhat gloomier about their business prospects, though only 10-17% actually expect profits to fall. The most bullish are those in Ireland, Central and Eastern Europe and the UK.
The optimism extends to the real estate prospects of different European cities for 2014. The ratings the survey respondents gave are sharply up on last year’s, averaging 3.58 for investment and 3.17 for development on a scale of 1 = very poor to 5 = excellent, compared to the low 2.90 and 2.59 respectively in the previous survey.
Munich is top performer
Munich once again tops Emerging Trends 28-strong cities’ league for the likely performance of existing investments, but Dublin has zoomed up to the number 1 spot for new acquisitions. London is rated top for development this year, bumping out last year’s pick, Istanbul. However, Paris, which last year featured in the top 10, has slid to number 14 for existing investments and 17 for new ones.
France’s lacklustre economy, rising taxation and political uncertainty are dampening enthusiasm for the city, though Emerging Trends notes that international investors still consider it core to their portfolios. Indeed, there is no sign of the gush of equity into European real estate abating. Nearly 75% of respondents expect more to come in this year, particularly from the Asia-Pacific region. Europe’s debt drought is also easing, with 51% of respondents saying there will be more money available for refinancing and new investments this year. “There has been a huge change in the availability of credit: loan-to-value levels are becoming higher and the range of lenders in the secondary market is expanding rapidly,” says one.
Again, there are varied opinions on how generous lenders will be this year: respondents are most upbeat about the UK, but a third of respondents thought there would be more debt forthcoming (see fig 2) even in Southern Europe. That said, respondents report that banks everywhere are still “very strict” about the assets and borrowers they will back.
With increasing business confidence and more capital comes the willingness to take more risk. Europe’s real estate industry is now prepared to venture into areas that “last year would have been regarded as no-go: Spain, second-tier cities, less-than prime buildings in first-tier cities, development alternatives such as student housing, data centres and real estate debt”, Emerging Trends finds.
Moving out from the core
The move beyond the tip-top core – both in terms of location and assets – is unmistakable, with prime regional central business districts, development and buildings on the fringes of prime locations in ‘safe-haven’ European capitals all expected to attract more capital this year. In the core markets, the capital push will continue and Emerging Trends’ interviewees talk of “pricing bubbles” and “overheating”; 59% of respondents think that prime assets are overpriced. “If there is a risk scenario today, it is that capital flows may be getting ahead of underlying fundamentals,” warns one global fund manager. “In a lot of markets there is limited rental growth, but capital is available to buy.”
Enthusiasm for Southern Europe, Spain particularly, is marked (see fig 3). Spain made it onto Emerging Trends Europe’s watch list last year, but the speed of the change in sentiment is surprising. Opportunistic investors are heading the rush in, but mainstream institutions may not be far behind. “You will see one or two benchmark deals that give confidence for others to go in on the best stock in the best locations,” says one pan-European fund manager.
Meanwhile, investors’ search for good quality income is leading them into new areas. The spotlight is on residential: student housing, private-sector rented housing, retirement homes and serviced apartments are all judged to have better investment prospects than offices or retail in 2014. Data centres, healthcare and logistics property also get good ratings from respondents.
However, perhaps the most surprising finding is on sustainability. This year, Emerging Trends asked a much wider range of questions about the green agenda. Just over 75% of respondents say sustainability is in their business strategy, while 50% say they achieved higher rents in sustainable buildings.
Increasing regulation is clearly one factor pushing this interest in sustainability, but Emerging Trends Europe’s interviewees also point to others (see fig 4). Respondents say having a sustainable strategy is “part of the definition of fiduciary duty”, “demonstrates that you understand risk management” and helps attract third-party capital. A building’s greenness can help attract tenants and “sometimes be the difference between signing a lease or not”, according to another. Says one: “Absence of a green strategy today is as odd as a retailer that doesn’t have an internet strategy.”